While initiatives towards organic sourcing, shifting branch focus to sales, and liability approach to enhance net interest margin are appreciated, execution remains key and near-term opex/RoA pressures cannot be ruled out, particularly due to ongoing NIM risks. The brokerages' ‘Accumulate’ stance is driven by modest profitability ratios (RoA at ~1.3%) and limited seasoning of newer retail portfolios (credit costs remain untested through cycles).
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Dolat Capital Report
Federal Bank Ltd. reported lower net interest income growth (8% YoY), mainly owing to an immediate reset of its EBLR loans. However, low credit costs at 24 bps driven by a large corporate recovery, helped profits (+14% YoY), ex of which credit costs at 40 bps were in-line. Loan growth was muted at 2% QoQ, while deposit growth improved to 6.5% QoQ, along with strong traction in CA deposits.
Growth is expected to strengthen, driven by medium-yielding portfolios, resumption of growth of PL/cards, and regulatory clarity on gold. Measures have been introduced to enhance NIM stability, but maintaining NIM at current levels will be challenging, as per the bank.
We tweak earnings, factoring some moderation NIM for FY26E (similar as FY25 at 3.1%), partly offset by slightly higher loan growth.
Maintain ‘Accumulate’ rating with target price of Rs 220, valuing the bank at 1.3x FY27E price/adjusted book value against RoA/RoE of 1.3%/14%. While the recent reorientation strategy is in the right direction, execution remains key.
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Also Read: Adani Ports Q4 Results Review: Motilal Oswal Maintains 'Buy' Rating Post Inline Performance
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